Refunds and Redeposits

By Tammy Flanagan

January 14, 2011

One of the hot topics discussed among federal benefits specialists over the holidays was civilian service credit deposits and redeposits. That's because there was some clarification from the Office of Personnel Management regarding redeposits of refunded retirement contributions for Federal Employees Retirement System participants and a resolution regarding processing problems for employees who have attempted to pay civilian service credit deposits.

FERS Redeposits

Making a redeposit involves paying back refunded retirement contributions. This happens if an employee had a break in service and requested a refund of retirement contributions under FERS or its predecessor, the Civil Service Retirement System. Under CSRS, such refunds could be substantial, since CSRS employees generally contribute 7 percent of their base pay into the CSRS retirement fund. In 2011, if you are covered under CSRS and your salary is $70,000, you'll contribute almost $5,000 to the retirement system.

Under the FERS system, retirement contributions are much lower, generally 0.8 percent of base pay. (FERS employees also pay into Social Security and are expected to make contributions to Thrift Savings Plan accounts.) A FERS employee with a $70,000 salary this year would contribute only $560 toward into the retirement fund.

Employees can take a refund of these contributions when they leave federal service. If they later return to another federal job, can choose to pay back -- or redeposit -- these funds to the retirement system, with interest. The effect of paying back refunded contributions varies between CSRS and FERS and also could be affected by the date you apply for the refund and how much service the refund covers.

To make things more complicated, when FERS started in 1987, there was no provision for redepositing refunded FERS contributions. If an employee took a refund, credit for the service was permanently lost, both for retirement eligibility and computation of benefits. But the 2009 National Defense Authorization Act included provisions allowing employees to repay refunded FERS contributions.

But until recently, OPM provided little in the way of guidance about how to repay deposits and what would happen if an employee didn't. Now the agency has solved the mystery. Here are the new guidelines:

Correcting Past Mistakes

There's an old Irish saying: "When mistrust comes in, love goes out." Due to some errors and mishaps with computer systems at OPM, there hasn't been a lot of love for this agency lately. We shouldn't forget that officials at OPM do a lot of things right. They manage to pay monthly retirement benefits to more than 2 million retirees and survivor annuitants on time. The 2010 Federal Employees Health Benefits Program open season has closed with almost 9 million individuals covered by one of the many different health benefit plans for another year.

OPM's problems seem to occur just before an employee retires or during the retirement processing period. The agency makes calculations to ensure the correct amount of money has been deposited into the retirement fund for a particular employee, and that he or she is credited with the correct amount of federal service. The computer systems OPM has previously implemented or attempted to implement to streamline these tasks have not been as accurate or efficient as hoped.

OPM is in the process of refunding overpayments to employees and retirees who have overpaid their redeposits and deposits of civilian service credit payments, and also collecting underpayments. This correction is necessary due to the problems with a computer program OPM had been using to compute the interest due on deposits and redeposits.

The good news is the computer issues are now corrected. Still, it's no surprise that affected individuals are concerned -- especially those who have been told they were paying too little.

Let's say, for example, that Alice applied for and received a refund of her CSRS contributions after a break in service in 1983. She returned to federal service and asked to make a redeposit of her refund in 2008. Here are the rules for applying interest to CSRS redeposits:

Suppose Alice withdrew $10,000 in CSRS contributions on an application for a refund that was received by OPM in 1983. Using the first rule above to compute the interest, she would have paid about $50,000 under Treasury's rates if she paid the redeposit in 2008. But suppose the second computation was mistakenly applied. She only would have been charged 3 percent interest for the whole 25 years, for a total of a little more than $20,000.

Apparently there was some confusion about when employees were grandfathered under the 3 percent rate, and when the variable rates should have applied. Thousands of people were affected by errors in making such calculations. Now OPM has notified them and recalculated their interest payments. They have until June 30 to pay any outstanding balances without accruing additional interest.

Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.

For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Monday mornings at 10 a.m. ET on or on WFED AM 1500 in the Washington metro area.

By Tammy Flanagan

January 14, 2011